Two recent opinions clarify the tax treatment of temporary employment services under both the sales and use tax and Texas franchise tax laws.
In Allstate Insurance Company v. Hegar, the court held Allstate liable for sales tax on outside adjustors’ compensation. In doing so, the court rejected Allstate’s claim of the exclusion for a temporary employment service. Allstate sought a refund of sales tax paid on charges by a third-party, who provided employees to perform taxable insurance claims adjusting and processing. The court discussed the five elements that Allstate had to satisfy in order to treat the third party’s charge as non-taxable under the exclusion. It considered whether:
1. the service performed by the assigned worker supplements the employer’s existing workforce on a temporary basis;
2. the third party qualifies as an employment service under Texas Labor Code § 93.001;
3. the service is normally performed by the employer’s own employees;
4. the help is under the direct or general supervision of the employer to whom the help is furnished; and
5. the employer provides all supplies and equipment necessary.
As part of its analysis, the court evaluated two types of adjusters that provided temporary employment services to Allstate: (1) “inside” adjusters who were employed by the third-party but worked inside Allstate’s facilities and (2) “outside” adjusters who were also employed by the third-party but did not work inside Allstate’s facilities. Rather, they worked out in the field or at the third-party’s facilities.
Ultimately, the court determined that Allstate was entitled to a sales tax refund on the charges for “inside” adjusters’ services, but not those of the outside adjusters. For the latter, the court held that Allstate failed to prove that it provided them all of the necessary supplies and equipment. The court focused on Allstate’s contracts with the third-party, which identified certain equipment (e.g., cell phones and laptops) necessary to perform the services in a manner acceptable to Allstate. This contractual language implied the listed equipment was essential and indispensable to providing the adjusting services. Because Allstate did not provide the necessary equipment to the “outside” adjusters, Allstate was not entitled to a refund of sales tax on the “outside” adjusters services.
The Comptroller filed a Petition for Review with the Texas Supreme Court on May 11, 2016. Allstate’s cross-Petition for Review is due June 3, 2016.
Comment: Taxpayers should review their temporary employment service contracts in light of the court’s detailed explanation of each statutory element, paying particular attention to the contractual treatment of supplies and equipment.
In a recently-published hearing decision, the Comptroller held that a swimming pool management company was not entitled to the franchise tax revenue exclusion for staff leasing companies because the taxpayer failed to prove that it was a “temporary employment service.” See Comptroller Hearing No. 111,655 (October 19, 2015, released to STAR March 2016); Tex. Tax Code § 171.1011(k) (note: the statute has been amended to use the term “professional employer organization rather than “staff leasing service company”).
Specifically, the Comptroller rejected the taxpayer’s attempt to exclude the amounts that its clients (homeowners’ associations) paid for lifeguard wages and benefits because the taxpayer failed to establish that the pools were staffed with lifeguards other than those provided by the taxpayer. Because the taxpayer’s lifeguards did not support or supplement its clients’ existing workforces, the Comptroller held that the taxpayer did not qualify as a temporary employment service.
Comment: Both the sales tax and the franchise tax rely on Texas Labor Code § 93.001’s definition of “temporary employment service.” And, although, the Comptroller’s hearing decision was authored prior to the court’s opinion in Allstate, the two rulings appear consistent.
The state district court previously clarified the tax treatment of temporary employment services in Taylor & Hill, Cause No. D-1-GN-10-004429, 200th Judicial District, Travis County, Texas (Judgment July 27, 2011). The state district court held that Taylor & Hill, a professional engineering services firm qualified to exclude from its revenue payments made to its engineer-employers who were assigned to engineering projects at large chemical plants.